Cohabiting couples could be set for a windfall worth billions as ministers consider new rules that could extend financial perks of marriage

As many as 3.3million cohabiting couples could be set for tax and other financial perks under new legislation being considered by ministers, a new study suggests.

Unmarried couples do not currently have any access to the financial benefits afforded to those who are married or in civil partnerships. However new legislation being considered could change this, which would see cohabiting couples benefiting from pension, tax and inheritance tax boosts.

The extra funds could be worth billions of pounds, the study by mutual insurer Royal London suggests.

Equal rights? The new rules could mean opposite-sex cohabiting couples who choose to enter into civil partnership have the same rights as those who are married

At present, opposite sex couples can marry, but are forbidden from entering into civil partnerships. Meanwhile same-sex couples can choose to marry or form civil partnerships.

However a bill is currently going through the House of Commons, which would require government to look into how the law could be changed to even out this imbalance so that opposite-sex couples can form civil partnerships as well.

The bill, being taken through the House of Commons by Conservative MP Tim Loughton, received an unopposed Second Hearing earlier this month.

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Should it prove successful, the bill could prelude a change in legislation that would mean cohabiting couples could receive the same financial benefits as married couples by forming a civil partnership.

It is very unlikely all would wish to do so. However, any increase would see the bill for these benefits and perks rise.

Steve Webb, Director of Policy at Royal London said: ‘Millions of couples who live together could potentially benefit to the tune of several billion pounds if they were able to register a civil partnership. The biggest areas where they could gain include new rights under company pension schemes, access to income tax breaks for couples and entitlement to bereavement benefits.

‘But some could also see large gains from inheritance tax advantages currently restricted to married couples and same sex civil partners. This reform is long overdue and would stop these couples being treated by the state as second class citizens.’

The study highlights just how great a disparity there is between the rights of those who are married and those who choose to cohabit but not tie the knot.

The myth of ‘common law’ marriage still exists, with thousands of cohabiting couples believing that they have or gradually accrue some of the rights afforded to married couples. However, a couple can be together for decades, share a home, mortgage, children, and still not have any of the benefits of a married couple.

Should the rules change, cohabiting couples will still have to form civil partnerships in order to be eligible for any benefits.

Since many are unlikely to do so, not all of the 3.3million cohabiting couples will benefit, says Royal London.

However it adds that the number of people cohabiting has doubled in the last 20 years and continues to rise, so the number of potential couples could set to increase and the costs also grow steadily.

Some of the benefits that opposite-sex couples could gain:

Benefits for all ages: Married couples and those in civil partnerships have access to financial perks of benefit at all different ages

Access to each other's pensions

At the moment, married couples can generally name their spouse as a beneficiary of their occupational pension should they pass away.

This means that widows or widowers often receive a yearly sum from the pension scheme when their partner passes away.

This right is also open to same-sex couples in civil partnerships.

Should opposite-sex couples be able to form civil partnerships they could also receive a ‘survivors’’ pension.

Royal London estimates that the cost of this could easily run into billions of pounds.

A marriage allowance

Most married couples and civil partners are entitled to a tax allowance worth £230 a year. Cohabiting couples are not.

Bereavement benefits

Bereavement benefits are available to many married widows and widowers. These benefits have been dramatically overhauled in recent months, with many groups seeing their entitlement cut significantly.

Nonetheless, financial support is still available, paid for out of the National Insurance contributions of the deceased. After all, a deceased spouse may have made National Insurance contributions for decades and not have lived to draw a penny of it through their state pension, so a portion of this is given to their families when it is needed most.

Despite the recent ‘modernisation’ of the benefits, they are still not available to unmarried couples, even those with young children.

Inheritance tax

Married couples and couples in same-sex civil partnerships can pass on their wealth to their surviving spouse without paying any inheritance tax.

They can also transfer any unused portion of their inheritance tax threshold to their spouse.

Married couples and those in same-sex civil partnerships can also benefit from an extra tax break designed to make it possible to pass on a family home up to the value of £1million.

Cohabiting couples do not benefit from any of these at present.

State pension

The new state pension only allows individuals to claim a state pension based on their own National Insurance contributions.

However, the old system, which most of today’s pensioners fall under, is different. For example, an older married woman could see her state pension boosted by around £2,500 per year following the death of her husband.

Cohabiting partners do not have the same rights, but if the rules changed, older cohabiting couples who registered for a civil partnership could be able to benefit.

Helen Morrissey, Personal Finance Specialist at Royal London adds: ‘With each passing year more and more people are choosing to live together as a couple without marrying, yet we still have a tax and benefit system which barely recognises their existence.

'It cannot be right that they pay the same tax and National Insurance contributions into the system as their married counterparts but are entitled to get less out of it. The ability to register a civil partnership would give the authorities no excuse not to recognise this large and growing group.’

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